Our guest blogger is Julia Gordon, the director of Housing Finance and Policy at the Center for American Progress Action Fund.
Recent headlines suggest that Fannie Mae and Freddie Mac have launched a brand-new “bailout” program for underwater homeowners. But no such thing has happened.
What may have triggered the speculation is that on March 1, these companies will finish implementing improvements to their short sale and mortgage release policies. A short sale is when a lender gives a homeowner permission to sell their home for less than the amount of the mortgage owed. A mortgage release (sometimes called a “deed-in-lieu-of-foreclosure”) permits a homeowner an opportunity to hand in the keys in return for avoiding the expense and indignity of a foreclosure.
In both cases, the homeowner ends up leaving the house and taking a credit score hit — hardly a bailout.
It is understandable why some might be confused, because Federal Housing Finance Agency (FHFA) Acting Director Ed DeMarco, who is currently the conservator for the beleaguered mortgage giants, has characterized short sales as forgiven principal when discussing the issue of principal reduction.
But they are not the same at all. Principal reduction right-sizes the mortgage as part of an effort to help homeowners keep their homes, a result that stabilizes families, neighborhoods, and the housing market. In a short sale, the only homeowner that gets the benefit of the forgiveness is the new homeowner, who gets to buy the home at a mortgage pegged to the real market value. While short sales and mortgage releases are important for the loss mitigation toolbox, they simply do not serve the same function as principal reduction.
In short, although the new policies have usefully clarified and simplified the process for getting a short sale or a mortgage release, they do not represent a fundamentally new approach to helping underwater homeowners and the housing market. Those waiting for FHFA to permit principal reduction — a crucial policy change that could significantly strengthen and lock-in the housing recovery — will just have to keep waiting.